Why Aren't There More Employee-Owned Firms?

Your basic for-profit business firm is a loosely incentive-compatible institution. Nobody's going to make any money unless people want to work there, and employees aren't going to be able to to keep their jobs unless the company makes money. But within that broad terrain there's ample room for conflicts of interest and struggle over the control of organizational resources.

The obvious consequence is that the owners of capital will not have an incentive to design organizations to solve problems. Instead, they will have an incentive to maximize the returns to their investment. This will mean that they will, as a general rule, prefer organizational rules that are lousy at problem solving but that increase their profits to organizational rules that are less lucrative and more efficient. Similarly, managers will prefer rules that increase their personal returns and protect their jobs to rules that are better at furthering organizational goals but likely to put their economic benefits at risk. And if the owners of capital, and, to a lesser extent, the managers, are setting the rules, then these aren’t problems that one can design around, or even decide that you reluctantly can accept. The actors doing the designing – the “you” of Tim’s phrase – are the owners or the managers. From their perspective, the problems aren’t actually problems. They are not bugs, they’re features. They are part of what the Org is supposed to do, from the perspective of its most important designers.

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What pops out of that analysis is the theory that employee-earned firms should outperform ones where ownership and labor are strictly separated. When profits are bound to be internalized by the staff, the conflict between worker goals and owner goals will be greatly diminished and the organization will be better equipped to solve problems. Of course the workers might lack capital—not being capitalists—but this isn't 1872. We have an elaborate financial system that's capable of making loans to finance takeover schemes. But while there are certainly plenty of employee-owned companies in America, employing tens of thousands of people, they're not exactly lighting the world on fire.

I think the most likely answer is that the most serious intraorganizational conflicts have to do with managers rather than owners. Small-business owners are disproportionately likely to be happy and attribute their own happiness to being their own boss and setting their own schedule. The difference between being one guy who owns 100 percent of a small firm and being one of 5,000 guys who owns one-five thousandth of a big firm is that the sole proprietor is free from management in a way that the employee-owner never will be. In an increasingly prosperous future, my bet is more people will opt for the psychic benefits of self-employment over the pecuniary benefits of large-scale productivity-maximizing organizations in part for this reason. As a result, per capita GDP growth will tend to stagnate as people self-select into work roles with high amenity value.